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Rupee Falls as Modi Vows Retaliation for Attacks

(Bloomberg) -- Indian bonds extended declines and the benchmark equity index completed its worst week in four months after Prime Minister Narendra Modi said the nation will give a “befitting reply” to Thursday’s assault that killed dozens of soldiers in Kashmir.

The yield on the most-traded 2028 bonds rose five basis points on Friday to 7.57 percent in Mumbai, while the S&P BSE Sensex index of shares closed little changed after declining as much as 1 percent. The rupee pared losses on suspected intervention by the central bank.

Bonds have declined in six of last eight weeks amid concerns about rising oil prices and government’s record $100-billion borrowing plan, while the Sensex capped its biggest weekly retreat since the end of October. The worst terror attack on India since Modi came to power is weighing on investors as they ponder the scale of the government’s retaliation.

Primary dealers had to step in to save a government bond auction on Friday as yields climbed. Dealers bought 16.65 billion rupees of bonds out of 20 billion rupees auctioned, central bank said in a statement.

“Markets were already under pressure due to higher oil prices and the fear of escalation in geopolitical tensions has further unnerved investors,” said Sandeep Bagla, associate director at Trust Capital Services India Pvt. “The markets will remain choppy for few days until there is clarity on the tensions.”

Thirty seven paramilitary personnel died and several others injured in an assault yesterday on a convoy in the Indian-controlled Kashmir. Jaish-e-Mohammad, a Pakistan-based terror group, claimed responsibility for the attack that took place in Pulwama near the state capital Srinagar. It was the worst since a 2016 ambush on a military camp which prompted India to launch cross-border attacks against Pakistan.

“The security forces have been given full freedom to decide -- we have full faith in the valor and bravery of our armed forces,” Modi said in a speech.

The rupee slid 0.1 percent to 71.2275 against the dollar. The currency pared losses of as much as 0.3 percent on speculation the central bank sold dollars, said Sajal Gupta, head of foreign-exchange and rates at Edelweiss Securities.

“Price patterns shows that there is some RBI intervention,” Gupta said. “On a normal day, when stocks are down and bond yields are rising, the rupee should have been depreciating by half a percent in the current scenario.”